Growing data traffic may power telecom company profits

Growing data traffic may power telecom company profits

The convergence of many types of high bandwidth content — especially video — on mobile devices, tablet computers, and Internet–connected television is generating rapid growth in data traffic on telecommunications networks. Forecasts suggest traffic may grow more than 30% annually over the next several years.

Telecom companies may be able to translate data traffic into profit growth, at a time when valuations in the sector remain attractive. The sector has lagged during the global equity market recovery that began in March 2009.

Convergence is an opportunity for telecom companies to reap greater profits. To do so, they must effectively manage their pricing plans, ensure network quality, invest in new capacity, and navigate government regulations. The companies that can deliver the best quality network service while managing their costs effectively stand to be the winners.

Market skepticism can be seen in the sector’s low valuations. In fact, for many telecom companies, the dividend yield of their stock is higher than the yield of their bonds. The average dividend yield of the MSCI World Telecommunications Services Index is above 5% as of December 31, 2010 (Source: MSCI).

The telecom sector today offers investors an attractive level of current income and the opportunity to participate in the potential growth that may come with rapidly increasing data traffic.

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MSCI World Telecommunications Services Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets in the telecommunications sector. MCSI World Index is an unmanaged index of equity securities from developed countries. Securities in the fund do not match those in the index, and performance of the fund will differ. It is not possible to invest directly in an index.

International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. A fund that invests in fewer issuers or concentrates its investments by region or sector, involves more risk than a fund that invests more broadly.

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